Many readers have picked up on my disdain for the R&D tax incentive system in Australia and its role in propagating the mediocrity of our micro-cap public companies, particularly in the bioscience sector. When it comes to encouraging small, innovation-led enterprises to flourish, the general guidance for governments based on success stories around the globe, is “keep it simple and stay out of the way.”
This message somehow hasn’t reached our politicians.
Australia’s success as an innovator suffers mightily from the government’s inability to make basic structural reforms, reforms that frankly don’t hit the treasury in any particularly dramatic or upsetting fashion. Up-front taxation on employee incentive schemes is one shining example of where our policy makers simply illustrate how clueless they are about business and entrepreneurship, and the wheels have been spinning for literally decades on this issue. Another example is the fragmented and fractured distribution of early commercialisation incentive schemes that are not only hard to navigate, and bloated by public service “oversight”, but are needlessly bureaucratic to access. The government should want entrepreneurs running their companies, not filling out tortuous paperwork.
However, when I am asked what I think is the #1 biggest contributing policy disaster behind our mediocre bioscience landscape, my answer is the R&D tax incentive scheme. People get really upset when I say this, but it’s true, and I strongly believe it needs a re-think. When you look at the number of crap ASX-listed companies waiting for their tax rebate as a means of survival, this tells you everything you need to know. I’m not saying that we shouldn’t have R&D tax incentives, we should, I’m saying that the incentive should be directed more carefully with a view to industrial recruitment and economic diversification.
Not propping the balance sheet of poor quality companies. What is a poor quality company? A poor quality company is, quite simply, a company that would fail without the incentive.
My personal opinion is that ASX-listed micro-cap companies that currently meet the turnover threshold test for tax incentive refunds should be ineligible for this refund. Why? Because they have chosen to tap the public purse for financing by virtue of being listed. The access to tax incentives just means that management takes a chronically underfunded view of the financial resources needed to sustain the business, and instead of dedicating resources to develop the commercial and product “engine” of a company, resources are dedicated to “achieve” a sufficiently large tax refund and keep the gravy train running for a little while longer at taxpayer’s expense.
There are companies in the “Long Tail” of the ASX that actually go into periods of stasis and do nothing while waiting for R&D tax credits, cutting burn, reducing their competitiveness and prolonging product development timelines. I think private companies that intrinsically have less access to capital should still remain eligible, but public companies have other financing options and their cost of capital is lower.
Accumulated tax losses as offset against future product/service revenues – yes. Incentive refund – no.
My personal opinion is that the best thing that could ever happen to the ASX biosciences sector would be for the government to make listed small-cap companies ineligible because a lot of unsustainable and marginal businesses would simply fail. This in turn would provide greater clarity around which businesses are more deserving recipients of public capital and would actually boost the enthusiasm for the sector as an investment proposition because the average (remaining) quality would improve. It would be a short-term shock, but it would be a long-term gain.
Like all evolutionary pathways, sometimes a bit of Darwinian selection is a good thing.